The Reserve Bank could deliver the first cut in interest rates in more than two years this afternoon as it looks to counter a slowing economy, low inflation, and uncertain international outlook.

At the last rate review in March the central bank’s governor Adrian Orr said the next move was more likely to be a cut in rates.

Analysts are narrowly backing a cut but said the decision will be a line call.

“The New Zealand economy is still ticking along okay, but having said in the previous review that it was more likely to cut rates rather than raise them the bank has almost painted itself into a corner,” said Gareth Kiernan, the chief forecaster at consultancy Infometrics.

The official cash rate (OCR) has been stuck at 1.75 percent since late 2016 and the expectation is that the Reserve Bank (RBNZ) will cut by a quarter of a percentage point to 1.5 percent, and signal another similar sized cut later in the year. That might flow through into bank lending and deposit rates.

Kiernan said the last rate reduction did little to stimulate the economy, increase consumer spending or business investment, and a rate cut would be like sending out the entire fire brigade to rescue a kitten from a tree.

Recent data has shown the economy has slowed over the past year to about 2.3 percent annual growth, with sluggish growth in retail spending, a cooling housing market, inflation sitting at 1.5 percent, but unemployment still close to decade lows.

The RBNZ is required to get inflation to about 2 percent, as well as maximise the number of jobs in the economy. However, inflation in western economies has been stubbornly low for several years and few central banks have reached their targets.

Low inflation is regarded as an economic danger because it can depress prices, economic activity, wages and investment.

ASB chief economist Nick Tuffley said a rate cut is probably needed and would help lift the economy and help the RBNZ meet its inflation target.

“The cooling growth outlook points to a sizeable risk that core inflation will retreat further … We are also becoming more concerned that cooling growth momentum is likely to translate into increasing labour market slack within the economy.”

The decision is also the first for the RBNZ’s new monetary policy committee, which contains four bank staff and three outside members. Minutes of the committee’s meetings and the result of any contested votes will be published on the same day as the RBNZ releases an interest rate decision.

Leave a comment